Archive for November 29th, 2012
The fiscal cliff is coming! Run for the hills! There have been endless stories in the mainstream media about the “fiscal cliff” that our country is facing if the Democrats and the Republicans can’t come to some sort of an agreement. If there is no agreement, taxes will go up and government spending will be reduced by a very small amount. And yes, that would likely push the U.S. economy into another recession, although there are many that would argue that we are already in a recession right now. In any event, there is a tremendous amount of distress out there about the fact that something might interrupt the debt-fueled prosperity that we have all been enjoying. You can almost hear them now: “No! Please don’t cut government spending! Please don’t raise taxes! Please keep stealing more than 100 million dollars from our children and our grandchildren every single hour of every single day so that we can continue this economic illusion that feels so very good.” The American people want the government to give everything to everybody, but they definitely do not want to pay for it. They want a big government that showers them with government checks and government benefits, but they don’t want to cough up the ridiculous amount of money that it would take to fund such a government. So we just keep ripping off our kids and our grandkids. What we are doing to future generations is not just immoral, it is criminal. If they get the chance, someday they will look back and curse us for destroying their futures and destroying their country. So why do we continue to do this to them? Because we are greedy and selfish and we are absolutely desperate to maintain the massively overinflated standard of living that we have been enjoying. We have lived way above our means for so long that we don’t even know what “normal” is supposed to be anymore.
But nobody can spend far more money than they bring in forever. At some point an adjustment comes, and our adjustment is going to be exceedingly painful.
Right now, the overwhelming consensus in the United States seems to be that we should put off any economic pain for as long as possible. The American people don’t want significant cuts to government spending and they don’t want taxes to be raised to pay for the spending that we are already doing.
But if the Republicans and the Democrats don’t agree to a deal soon, we are going to see taxes raised substantially and government spending cut by a little bit. A recent CBS News article did a good job of describing exactly what this “fiscal cliff” that we are facing actually is…
There are two parts to the so-called fiscal cliff. The first is the scheduled expiration of the tax cuts enacted in 2001 and 2003 under President George W. Bush, the payroll tax holiday enacted under President Obama, and a host of other tax breaks. The second is $1.2 trillion in automatic spending cuts to defense and domestic programs that are looming due to a 2011 deal that resulted from House Republicans’ reluctance to raise the debt limit.
Now, it’s true that if lawmakers fail to work out any sort of deal, there will be severe long-term consequences for the economy: According to the Tax Policy Center, going off the “cliff” would affect 88 percent of U.S. taxpayers, with their taxes rising by an average of $3,500 a year. Many economists, as well as the nonpartisan Congressional Budget Office, say the combination of spending cuts and tax hikes that are set to take effect would tip the economy into a new recession.
Please keep in mind that the “$1.2 trillion in automatic spending cuts” is not for a single year. When you break it down, the cuts to spending would be somewhere around 100 billion dollars a year. And a lot of those “cuts” are actually spending increases that would be cancelled. So those spending cuts would not really put much of a dent in our yearly budget deficits at all.
The tax increases would be more significant. Middle class families would be paying thousands of dollars more per year in taxes. These tax increases would raise some more revenue for the federal government, but they would also do significant damage to the economy in the short-term.
Do you know what they call a combination of government spending cuts and tax increases over in Europe?
They call it “austerity”.
Nations like Greece and Spain have tried this. They cut spending and raised taxes in an attempt to reduce government budget deficits. What happens is that the spending cuts and the tax increases cause a significant economic slowdown and this causes tax revenues to come in much lower than projected. So then more spending cuts and tax hikes are necessary in order to try to get closer to balancing the budget. But then tax revenues fall even more.
In the end, both Greece and Spain still have large budget deficits and yet the economies of both nations are suffering through depression-like conditions. The unemployment rate in both nations is now over 25 percent. Just check out this chart right here to see how nightmarish austerity has been for the economies of both Greece and Spain.
So that is why everybody is freaking out about the fiscal cliff. They don’t want to go down the same road of austerity. They want to keep living in an economic fantasy land where we can borrow our way to “prosperity”.
But it is all a lie. The lines at the Apple stores, the crazed consumers on Black Friday, the restaurants teeming full with people and the government that thinks that it can take care of everyone from the cradle to the grave and yet keep taxes low. It is all a giant lie.
And no, please do not think that I am in favor of raising taxes. I most definitely am not. I believe that the government brings in more than enough money already.
Personally, I believe that we could have a system that completely eliminates income taxes and that funds the government through tariffs and various other forms of taxation. It was good enough for the Founding Fathers and it should be good enough for us. But that is a subject for another article.
Our current system has allowed us to live way beyond our means for an extended period of time, but it is only a matter of time until it all comes crashing down.
In fact, the game is already over. We have already destroyed the future. At this point it is only a matter of how long we can keep kicking the can down the road and putting off the pain.
Sadly, what we have done on a national level is simply a reflection of our “buy now, pay later” society. We have become a nation that is constantly willing to sacrifice the future in order to make the present more pleasant.
Just check out this video. We have become addicted to a prosperity that we cannot possibly pay for. But as long as someone will keep lending us the money we will continue to enjoy it.
We print, borrow and spend without giving any thought to what we are doing to the future of this country. We are shredding confidence in our currency and we are wrecking the greatest economic machine that the world has ever seen.
And all of our politicians and all of our “leaders” prance about as if they are the smartest generation of Americans ever, and they think that they are an “example” for the rest of the world, but if our Founding Fathers were around today they would be absolutely horrified about what they have done to the country that they built.
If you think that the economy is bad now, you just wait.
We are still in the “economic fantasy land” phase where we are enjoying a massively inflated standard of living constructed on a mountain of borrowed fiat currency. Our economy is being held up by trillions of borrowed dollars, and all of that money makes the U.S. economy appear to be far more prosperous than it actually should be.
When we have to start living closer to what our real standard of living should be things are going to get really bad.
Most Americans simply don’t understand that if the federal government went to a balanced budget tomorrow it would instantly plunge the U.S. economy into a depression.
Just look at Greece and Spain. The same thing is going to happen to us one way or another.
So enjoy this false prosperity while you still can. This is about as good as things are going to get, and from here on out it is downhill for America.
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.7 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.
Uh huh. What was the improvement attributed to?
The acceleration in real GDP in the third quarter primarily reflected upturns in private inventory investment and in federal government spending, a deceleration in imports, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by a downturn in nonresidential fixed investment and decelerations in exports and in PCE.
That (government deficit spending) is bad, not good. But it’s reported as good and people lap it up. And inventory build is indeed GDP, but building inventories mean that manufacturers are not selling as fast as they’re producing — this typically happens right in front of recessions!
As for specific indications of future demand? They’re not so good:
Equipment and software decreased 2.7 percent, in contrast to an increase of 4.8 percent.
Real federal government consumption expenditures and gross investment increased 9.5 percent in the third quarter, in contrast to a decrease of 0.2 percent in the second. National defense increased 12.9 percent, in contrast to a decrease of 0.2 percent. Nondefense increased 3.0 percent, in contrast to a decrease of 0.4 percent.
Yep. Blow money on bombs and guns; a time-honored way to create demand that is recurring. So long as that’s paid with taxes it’s ok, but when it’s not…..
I’m unimpressed and skeptical, although this report certainly throws some cold water on the “more monetary stimulus NOW!” screaming from certain people on the left.
Three visualizations describe the breakdown of PSMs–previously successful models: S-Curves, Supernovas and Rising Wedges.
A successful model traps those within it; escape becomes impossible.
I recently highlighted one historical example of a PSM (Previously Successful Model) inOur Dust Bowl Economy (November 20, 2012): in the ample-rain era of the 1920s, farmers in the semi-arid southern Midwest had reaped huge profits by plowing up and planting fragile native grasslands. They poured their profits into homesteads, equipment and more land to enable further expansion.
When grain surpluses pushed prices down, their “model” had only one “solution”: plant more land and harvest even more grain to compensate for lower prices. When prices fell from $1 per bushel to $.25/bushel, the model collapsed.
This previously successful model exacerbated the Dust Bowl and left the trapped farmers with no alternative but to either keep trying to make a failed model work or leave and abandon all their sunk capital in land, homes and farm equipment.
A more current example can be found in Microsoft (MSFT a.k.a. Mister Softee), whose previously successful model took a 42% marketshare in smartphones and reduced it to 2%. Here is an excerpt from Microsoft has failed (semiaccurate.com):
Microsoft has three product lines that underpin everything, Windows, Windows Server, and Windows Mobile. On those, the other moneymakers, Office and Exchange, run exclusively. The apps use protocols that are locked down with dubious methods, and will not run on any competition. The competition is likewise excluded from doing what Microsoft can, either directly like Novell, or by raising the cost to the point of it not being profitable. This is how the wagons are circled, with every iteration, the cost of competing go up, and value of alternatives go up too.
The problem is that if you are locked in with a choice of 100% Microsoft or 0% Microsoft, once someone goes, it isn’t a baby step, they are gone. Once you start using Google Docs and the related suites, you have no need for Office. That means you, or likely your company, saves several hundred dollars a head. No need for Office means no need for Exchange. No need for Exchange means no need for Windows Server. No need for Office means no need for Windows. Once the snowball starts rolling, it picks up speed a frightening pace. And that is where we are. The barriers to exit are now even more potent barriers to entry.
Microsoft bought Nokia to both kill off one competitor and to buy their market share. Microsoft at the time had approximately 12% smartphone OS marketshare, Nokia a bit over 30%. With the collaboration, Nokia and Microsoft, together with all the other OS partners selling Windows Phone 7.x, sales are now hovering around 2% of smartphone market share.
Microsoft’s mobile aspirations have failed so spectacularly that it is almost impossible to account for. Rather than fix the lock in that excludes the overwhelming majority of the market that does not have a Windows phone, Microsoft doubled down with the new iteration playing the same compatibility games they did before to lock out developers, competitors, and innovators.
The death spiral for Microsoft is in full effect, and management is expending a lot of effort to speed it up. Microsoft is unwilling to change, and that is very clear. Even if they wanted to, they are culturally far beyond the point of being able to. What was a slow bleed of marketshare is now gushing, and management is clueless, intransigent, and myopic. Game over, the thrashing will continue for a bit, but it won’t change the outcome. Microsoft has failed.
I would generalize that the Microsoft model of buying competitors and stitching together quasi-monopolies has failed: first in mobile, next in tablets and eventually in operating systems and Office.
We see the immense power of previously successful models. Straying from the previously successful trajectory looks needlessly risky, even as the trajectory has rolled over and is heading for unpleasant impact.
Anyone who questions the previously successful model (PSM) is suppressed, fired or sent to Siberia as a “threat” to the enterprise’s success. Anyone who realizes the Titanic will inevitably sink and abandons ship leaves behind all their sunk capital: they leave with the figurative clothes on their back.
I have often covered the S-Curve model of initial development, rapid growth, eventual stagnation and collapse. Here is an example showing how financialization has peaked and will collapse: Our “Let’s Pretend” Economy: Let’s Pretend Financialization Hasn’t Killed the Economy (March 8, 2012).
Since most of the systems and fiefdoms that are trapped in previously successful models are bureaucracies, we can also profitably use the “Supernova” model of rapid expansion, brief equilibrium and sudden collapse: The Lifecycle of Bureaucracy (December 2, 2010):
I have often addressed the way that bureaucracies arise to solve a problem and quickly progress to becoming an even bigger and more intractable problem themselves, generally because they only know how to expand (the ratchet effect) and have no institutional ability to shrink or become more efficient:
Complexity: Bureaucratic (Death Spiral) and Self-Organizing (Sustainable) (February 17, 2011)
Failure: Don’t Despair, It’s The New Normal (May 4, 2011)
Global Crisis: the Convergence of Marx, Orwell and Kafka (July 25, 2012)
We can also visualize PSMs (Previously Successful Models) as a rising wedge, a pattern well-known to technical analysis. The previously successful model essentially charts an expansionary course that the organization is locked into. As the model fails to produce results, inefficiencies and costs rise, pushing the lower boundary of failure ever closer to the actual revenues.
Once the revenues fall below this threshold of viability, the organization breaks down, as there is no organizational capacity to radically reduce costs and headcount while significantly increasing efficiency and return on investment.
This model of breakdown describes all the major systems of local and Federal Government: the Pentagon, Medicare, Medicaid, Social Security, the higher-education/student loan cartel, the mortgage/housing cartel, sickcare, and so on.
Charles Hugh Smith – Of Two Minds